Retirement and Social Security typically go hand-in-hand, but in some cases, you may choose to continue working even after claiming benefits.
Living expenses are on the rise, and many Americans' savings are falling short. The average baby boomer has just $152,000 saved, according to a report from the Transamerica Center for Retirement Studies, and that money may not last more than a few years in retirement.
If you retire early and claim benefits only to realize you need another source of income, you may have no choice but to go back to work. Working while claiming Social Security can sometimes result in a significant reduction in benefits, but in some cases, that could pay off in the long run.
How does working affect your benefit amount?
Whether your not your wages will affect your benefit amount depends on your age and how much you're earning.
If you've already reached your full retirement age (FRA) -- which is age 67 for those born in 1960 or later, or either 66 or 66 and a certain number of months for those born between 1943 and 1960 -- working will not affect your Social Security benefits. But if you haven't reached your FRA yet, your benefits could be reduced if your wages exceed a certain limit.
As of 2020, your benefits will be reduced by $1 for every $2 you earn above the annual limit of $18,240 if you haven't yet reached your FRA. Then during the year you reach your FRA, your wages will be subject to a different limit, and your benefits will be reduced by $1 for every $3 you earn over $48,600.
Say you're 62 years old and just started claiming benefits, but you've decided to go back to work full-time to boost your savings. The median earnings in the U.S. are $47,684 per year, according to the Bureau of Labor Statistics, which is $29,444 over Social Security's annual limit for those who haven't reached FRA yet. That means your benefits will be reduced by $14,722 per year, or approximately $1,227 per month.
Is it worth it to continue working?
The good news is that even if your benefits are reduced substantially or withheld entirely, you might get some of this money back. Once you reach your FRA, the Social Security Administration will recalculate your benefit amount and you'll start receiving larger checks. In addition, after your FRA, your benefits will no longer be reduced regardless of your income.
For those reasons, it's not always harmful to continue working after you claim benefits. Your benefits may be reduced in the short term, but you'll get more money each month once you reach your FRA. Eventually, those higher payments could help you catch up or even surpass what you'd have gotten without working.
Additionally, if you're only working part-time and collecting Social Security at the same time, your benefits may not be reduced at all if your income falls under the annual limit.
If you plan to continue working for as long as possible and you haven't started claiming benefits yet, your best bet may be to simply hold off on filing. The longer you wait to claim (up to age 70), the more you'll receive each month. If you don't necessarily need your benefits to make ends meet while you're still working, you can maximize your monthly checks by waiting to claim.
However, if you've already started claiming benefits and you're deciding whether to go back to work or not, be aware that your monthly checks could be reduced in the short term. It's also important to consider your lifespan, because although you'll receive higher monthly payments once you reach your FRA, you'll need to live long enough to break even. If you don't expect to live very long in retirement, those larger checks may not make up for the amount that was withheld while you were working.
Working later in life may be a wise move in some situations, but be sure you know how it will affect your Social Security benefits. Your monthly checks could be reduced by thousands in the short term, and if you're going to be depending on that money, it's a good idea to consider that before you go back to work.